Build a Financial Foundation

November 20, 2017

Financial Best Practices

Every nonprofit, no matter the size, can benefit from implementing financial best practices. A “best practice” is defined as a policy or procedure that produces optimal results, and helps prevent fraud and error. It is important to keep in mind that a best practice is not always required by law; frequently, a best practice institutes a tighter control than the law requires, but the tighter control results in greater management oversight and can lead to easier audits. Here are three fiscal best practices that will lay a firm foundation for nonprofits large and small.

Controls flow from the top, down

It is essential that fiscal policies apply to and are followed by all levels of staff—from time keeping to purchasing to time off. Leadership sets the tone for the attitude front line staff takes in the application of policies. When the leadership team demonstrates that everyone in the organization is held to the same standards, the whole team begins to understand that the company culture is to avoid cutting corners.

Separation of Duties

A separation of duties, in the fiscal sense, implies there is not a single person responsible for the revenue and expenditure stream; rather, there are checks and balances built-in to the cash flow stream. For example, the person who opens the bank statements should not be the same person who reconciles the bank accounts. For some nonprofits with limited employees, there may be only one person who completes the administrative tasks. In this case, the separation of duties may be met by having a board member open and review the statements. Another example is whomever writes the checks does not have authority to sign checks.

Fund Accounting Software

There are many options for bookkeeping. The most important feature of an accounting software for a nonprofit is its ability to track funds, securely. Fund accounting software used correctly will make sure encumbered funds are spent in accordance with their requirements. The software should also require journal entries to make corrections, which will naturally result in a paper trail. Furthermore, good accounting software used correctly makes audits run more smoothly.

With all the choices involved in nonprofit accounting, strong fiscal controls, a clearly delineated separation of duties, and good accounting software are three best practices on which to build a strong financial foundation.

Holly earned her MBA at Indiana University, and has nearly 20 years of accounting experience at both for profit and nonprofit organizations. She believes there is a best practice for everything—from accounting to vacuuming—and loves to find hidden efficiencies.